Kent R. Nilsson Washington DC 20554 Inspector …report summarizing the activities and accomplishments of the Office of the Inspector General (“OIG”) during the six-month period

FEDERAL COMMUNICATIONS COMMISSION

OFFICE OF THEINSPECTOR GENERAL

Semiannual Report to Congress

Kent R. NilssonInspector General

Federal Communications CommissionOffice of the Inspector General

445 12th St., SWWashington DC 20554www.FCC.gov/OIG

April 1, 2008 - September 30, 2008

The Federal Communications Commission(left to right)

Deborah Taylor Tate, Commissioner; Michael J. Copps,Commissioner; Kevin J. Martin, Chairman; Jonathan S. Adelstein,

Commissioner; Robert M. McDowell, Commissioner

[email protected]

Call Hotline:202.418.0473 or 888.863.2244

www.FCC.gov

Report Fraud, Waste or Abuse to:

You are always welcome to write or visit.Office of Inspector GeneralFederal Communications CommissionPortals II Building445 12th St., S.W. Room 2-C762

Memorandum to Chairman, Federal Communications Commission

OFFICE OF INSPECTOR GENERAL

MEMORANDUM

DATE: October 31, 2008

REPLY TOATTN OF: Inspector General

SUBJECT: Semiannual Report

TO: Chairman, Federal Communications Commission

In accordance with Section 5 of the Inspector General Act, as amended, 5 U.S.C. App. 3 § 5, I have attached my report summarizing the activities and accomplishments of the Office of the Inspector General (“OIG”) during the six-month period ending September 30, 2008. In accordance with Section 5(b) of that Act, it would be ap-preciated if this report, along with any associated report that you prepare as Chairman of the Federal Communi-cations Commission (“FCC”), were forwarded to the appropriate Congressional oversight committees within 30 days of your receipt of this report.

During this reporting period, OIG activity focused most intensively on investigations, audits and Universal Ser-vice Fund (“USF”) oversight. This report describes audits that are in process, as well as those that have been completed during the preceding six months. OIG investigative personnel continued to address issues referred to, or initiated by, this office. Where appropriate, investigative and audit reports have been forwarded to the Commission’s management for action.

Information developed during this reporting period, including the initial results from the second round of USF audits, indicates that closer scrutiny of USAC’s management, processes, controls and self-improvement efforts is needed. Closer co-ordination by USAC with the FCC’s Managing Director and the Chief of the FCC’s Wire-line Competition Bureau should improve remediation and transparency and facilitate further improvements in the administration of USAC’s programs. Similarly, closer co-ordination by NECA’s management withthe FCC’s Managing Director and with the Chief of the Consumer and Governmental Affairs Bureau should improve the operation of the Commission’s Telecommunications Relay and Video Relay Services program.

This office remains committed to maintaining the highest possible standards of professionalism and quality in its audits, investigations, inspections and consultations and we welcome any comments or suggestions that you might have. Please let me know if you have any questions or comments.

Kent R. Nilsson Inspector General

Enclosurecc: FCC Chief of Staff FCC Managing Director

memorandum

Table of Contents - September 2008 2

Table of ContentsIntroduction 3

OIG Management Activities 5

Office Staffing 6

Office Modernization 7

Internship Program 8

Legislative and Policy Matters 8

Audit Activities 11

Financial Audits 12

Performance Audits 14

Universal Service Fund (USF) Oversight 17

Investigations 27

Activity During this Period 29

Significant Investigation Case Summaries 30

OIG Hotline 36

Reporting Requirements of the Inspector General Act

Section 5(a)

39

40

OIG Reports with Questioned Costs 42

OIG Reports with Recommendations that Funds Be Put To Better Use 43

Introduction - September 2008 3

IntroductionThe Federal Communications Commission

(“FCC”) is an independent regulatory agency,

with authority delegated by Congress to regu-

late interstate and foreign communications by

radio, television, wire, satellite and cable. The

FCC’s jurisdiction covers the fifty states, the Dis-

trict of Columbia, the Commonwealth of Puerto

Rico and all U.S. territories.

The FCC consists of a Chairman and four Com-

missioners, who are appointed by the President

and confirmed by the United States Senate.

Kevin J. Martin serves as Chairman. Michael J.

Copps, Jonathan S. Adelstein, Deborah Taylor

Tate and Robert M. McDowell serve as Commis-

sioners. Most of the FCC’s employees are locat-

ed in Washington, D.C. at the Portals II building,

which is located at 445 12th St., S.W., Washing-

ton, D.C. Field offices and resident agents are

located throughout the United States.

The Office of the Inspector General (“OIG”) is

dedicated to ensuring compliance with the re-

quirements of the Inspectors’ General Act and

assisting the Chairman in his continuing efforts

to improve the effectiveness and efficiency of the

Federal Communications Commission. The In-

spector General (“IG”), Kent R. Nilsson, reports

directly to the Chairman. The IG’s staff consists

of accountants, attorneys, auditors, economists,

and investigators. Principal assistants to the IG

are: David L. Hunt, Assistant Inspector Gener-

al (“AIG”) for Investigations/General Counsel;

Curtis Hagan, AIG for Audits; William K. Ga-

ray, AIG for Universal Service Fund Oversight;

Thomas Cline, AIG for Policy and Planning; and

Harold Shrewsberry, AIG for Management.

This semiannual report includes the major ac-

complishments and activities of the OIG from

April 1, 2008 through September 30, 2008, as

well as information on the IG’s goals and future

plans.

Did you know?FCC Commissioners and staff

will visit over 100 placesbefore 2/17/09 to discuss the

DTV transition.

OIG Management Activities

OFFICE staffing

office modernization

internship program

legislative & Policy matters

Did you know?FCC Commissioners and staff

will visit over 100 placesbefore 2/17/08 to discuss the

DTV transition.

6 OIG Management Activities - September 2008


Office Staffing

Additional personnel, as well as funding to sup-

port the work of the Office of Inspector General

(“OIG,” or “Office”), are essential to meeting the

objectives of the Inspector General Act and fulfill-

ing the responsibilities of the Inspector General

(“IG”) that are contained in section 0.13 of the

Commission’s rules. So far, it has been possible

to make progress because of the willingness of

the Chairman and his staff to support the work

of this Office. The Office is now comprised of

29 professionals, three support personnel and

two interns. With each addition, the professional

training, experience and personal commitment

to improving the administration of the Commis-

sion’s programs and eliminating fraud, waste and

abuse has increased. Additional personnel are

being added to meet the increasing demands that

are being placed on this Office as the Commis-

sion’s programs increase in size and complexity.

The IG has been interviewing and selecting can-

didates for management, attorney, auditor, and

investigator positions authorized by the FY2008

budget for the Universal Service Fund (“USF”)

oversight mission. Within the current reporting

period, the IG has hired six new employees and

selected an additional five that will start over the

next five weeks. Candidates are still being inter-

viewed and that process will continue until the IG

has reached the level of staffing required to effec-

tively perform the USF oversight mission. These

new four year term employees more than double

the size of the IG’s current staffing level. In ad-

dition to hiring USF funded term employees, the

IG has added two full time equivalent employees.

The IG continues to support the Federal Com-

munications Commission intern program and is

hiring one full time intern and one half-time in-

tern to fulfill critical administrative functions as-

sociated with an expanding staff and workload.

Our professional staff consists of well-trained,

seasoned professionals, most of whom have one

or more professional certifications. We support

their efforts to expand their bodies of knowledge

and professional recognition, and the Chairman

has funded examination preparation for the Certi-

fied Public Accountant and Certified Information

System Security Professional designations as well

as other professional training programs. In our

continuing efforts to increase the expertise of our

audits and investigative staffs, members of this

OIG Management Activities - September 2008 7


Office have also attended classes at the Inspector

General Criminal Investigative Academy, other

Federal Inspectors General training programs,

master’s level classes at colleges and universi-

ties, and other training programs. In addition,

we have leveraged our expertise in accounting

and auditing to revitalize the FCC’s professional

training for the Commission’s Certified Public

Accountants, thereby contributing to improving

the quality of professional education available to

all of the Commission’s accountants. During this

reporting period, Sophila Jones, Robert McGriff,

and Sharon Spencer were awarded the Certified

Government Financial Management designation.

Subsequent to this reporting period, the USF over-

sight auditing team led by Bill Garay, AIG for Uni-

versal Service Fund Oversight, received the Exec-

utive Council on Integrity and Efficiency’s presti-

gious Excellence in Auditing Award for USF audit-

ing work performed during this reporting period.

The award was presented to the team on October 21.

Office Modernization

We reported in the past that the IG had decided

to modernize the Office to insure that the OIG

will be able to address the oversight activity an-

ticipated for the Universal Service Fund, as well

as financial statements and information technol-

ogy audits of the FCC and its external program

segments, financial controls audits of the FCC and

its external program segments, and a steadily in-

creasing volume of complex investigations. As

noted above, the IG received funding that was

approved by the Commission, the President and

Congress to improve the OIG’s Universal Service

Fund oversight mission. These funds are provid-

ing the IG with resources to increase the num-

ber of auditors and investigators performing this

critical mission. The OIG has been purchasing

software and information technology equip-

ment that will aid auditors and investi-

gators in accomplishing their mission.

We continue to implement the Knowledge Man-

agement System discussed in previous semian-

nual reports. This new system will increase the

OIG’s ability to manage audits, investigation

case files, documents, reporting data and project

tracking activities while coordinating hundreds

of audits and related investigations. Information

gathered during the fiscal year 2007/2008 audits

of the USF disbursements for FY 2006 provided

8 OIG Management Activities - September 2008


information that will further assist in the devel-

opment and implementation of the system and

thereafter allow the system to move to full opera-

tion. The OIG Knowledge Management System

will also provide a “real time” overview of audit

and investigation status and project milestones.

Additionally, we have procured global positioning

system devices for auditors and investigators to use

when performing field operations and the addition

of inexpensive portable scanners will enable audi-

tors and investigations to immediately transmit

data to the OIG Knowledge Management System for

use by other personnel.

The IG is physically relocating the OIG to ac-

commodate the new hire expansion. This re-

location will take place over the next several

months and ultimately provide the IG with a

centralized controlled office environment that

is somewhat isolated from other FCC offices.

The IG’s goal is, eventually, to preclude other

personnel from unauthorized entry into the

OIG to protect sensitive data and information.

.

Internship program

The OIG welcomes college interns during the

fall, spring and summer semesters. Most of these

students take their internships for credit. Re-

cent interns have come from schools across the

country including American University, Arizona

State University, DePauw University, George-

town University, Hamilton College, James Madi-

son University, Marymount College, Long Island

University, North Carolina State University, Pur-

due University, the University of California at

Berkeley, the University of California at Davis,

the University of Maryland Law School, the Uni-

versity of North Carolina, and Xavier University.

These internships have proven to be rewarding

experiences for all participants. Students leave

with a good understanding of how a govern-

ment agency operates, and they have the oppor-

tunity to encounter challenges while enjoying the

rewards that can come from public service. In

turn, the Office has benefited from the students’

excellent work performance that, in part, has re-

flected their youth, exuberance, and special skills.

Legislative &

Policy matters

Pursuant to section 4(a)(2) of the Inspector Gen-

OIG Management Activities - September 2008 9


eral Act of 1978 (IG Act), 5 U.S.C.A. App. 3 § 4(a)

(2) as amended, our Office monitors and reviews

existing and proposed legislation and regulatory

proposals for their potential impact on the OIG

and the FCC’s programs and operations. Spe-

cifically, we perform this activity to evaluate the

potential of legislative initiatives for encourag-

ing economy and efficiency while helping to re-

duce fraud, waste, abuse, and mismanagement.

During this reporting period, the Office monitored

legislative activities affecting the activities of the

OIG and the FCC. The Office also monitored leg-

islation and legislatively related proposals that

may, directly or indirectly, affect the ability of IGs

to function independently and objectively. We

continued to monitor the Inspector General Re-

form Act of 2008 (H.R. 928). In addition to legisla-

tion, the OIG continuously monitors FCC policy

development and provides input as appropriate.

FCC Headquarters BuildingPortals II Building

Did you know?

Since 2004, OIG has recommended nearly $85 million in recov-eries in audits of the USF.

audit Activities

financial audits

performance audits

universal service fund oversight

audit activities

12 Audit Activities - September 2008

Financial statement audits provide reasonable as-

surance as to whether the agency’s financial state-

ments are presented fairly in all material respects.

Other objectives of financial statement audits are

to provide an assessment of the internal controls

over transaction processing for accurate financial

reporting and an assessment of compliance with

applicable laws and regulations.

Audit of the Federal Communications

Commission Fiscal Year 2008 Consoli-

dated Financial Statements

In accordance with the Accountability of Tax Dol-

lars Act of 2002, the Federal Communications

Commission (FCC) prepared consolidated finan-

cial statements for the 2008 fiscal year in accor-

dance with Office of Management and Budget

(OMB) Circular A-136, Financial Reporting Re-

quirements, and subjected them to audit. The

Chief Financial Officers Act of 1990 (“CFO Act”),

as amended, requires the FCC Inspector General

(IG), or an independent external auditor selected

by the Inspector General, to audit the FCC finan-

cial statements in accordance with government

auditing standards issued by the Comptroller

General of the United States (“GAGAS”). Under

the direction of the Office of Inspector General,

Clifton Gunderson LLP, an independent certified

public accounting firm, is performing the audit of

FCC’s FY 2008 consolidated financial statements.

The audit is being performed in accordance with

GAGAS, OMB Bulletin 07-04 as amended, and

applicable sections of the U.S. Government Ac-

countability Office (GAO)/President’s Council

on Integrity & Efficiency (PCIE) Financial Audit

Manual.

This audit is currently in progress.

Oversight of USAC’s 2007

Financial Statement Audit

The OIG performed oversight of the Universal

Service Administrative Company’s (“USAC”)

2007 Financial Statement Audit and Agreed-Up-

on Procedures related to USAC operations. Sec-

tion 54.717 of the Commission’s rules requires

USAC, the Universal Service Fund Administrator,

to obtain an annual audit that examines its opera-

financial audits

audit activities

Audit Activities - September 2008 13

financial audits

tions and books of account to determine whether

the USAC is properly administering the univer-

sal service support mechanisms to prevent fraud

waste and abuse. In response to this requirement,

USAC, in consultation with the Office of Inspector

General, contracted with PriceWaterhouseCoo-

pers LLP (“PwC”) to perform an audit of USAC’s

2007 Financial Statements and to perform Agreed-

upon Procedures established by USAC and FCC.

The 2007 USAC financial statement audit was per-

formed in accordance with Government Auditing

Standards issued by the Comptroller General of

the United States. PwC issued an unqualified

opinion on USAC’s financial statements and is-

sued a report on Internal Controls over Financial

Reporting and on Compliance and Other Matters.

The report on Internal Controls over Financial

Reporting and Compliance and Other Matters

identified two weaknesses in internal controls

over financial reporting that need to be remedied.

PwC reported that a material weakness existed in

USAC’s accounting for the allowance for doubt-

ful accounts (“ADA”) for the USF receivable ac-

counts. In this regard, the auditors recommended

that USAC take corrective action to ensure that the

most recent historical trend data is utilized when

calculating the ADA for USF receivables. The re-

port also noted a significant deficiency in USAC’s

accounting for fixed assets. The PwC recom-

mended that USAC implement corrective action

to ensure that an accurate fixed assets subsidiary

ledger is maintained throughout the year.

The Agreed-Upon Procedures (AUP) for the year

ended December 31, 2007 performed by PwC was

conducted in accordance with attestation stan-

dards established by the American Institute of

Certified Public Accountants. The procedures in-

cluded a review of USAC’s administration of the

USF program, corporate governance, USAC’s in-

formation technology environment, and a review

of select activities of the High Cost, Low Income,

Rural Healthcare and Schools and Libraries Sup-

port Mechanisms. The auditors noted several ex-

ceptions during the performance of the AUP. The

FCC has directed USAC to develop corrective ac-

tions to address each of the AUP exceptions noted

by PwC.

audit activities


Performance Audits

Performance audits are systematic examinations

that are conducted to assess the performance of

a government program, activity, or function so

that corrective action can be taken, if appropriate.

Performance audits include audits of government

contracts and grants with private sector organiza-

tions, as well as government and non-profit or-

ganizations that determine compliance with con-

tractual terms, Federal Acquisition Regulations

(“FAR”), and internal contractual administration.

Telecommunications Relay Service

The Telecommunications Relay Service (“TRS”)

Fund compensates communication service pro-

viders for the costs of providing interstate tele-

phone transmission services that enables a person

with hearing, or speech disabilities to use such

services to communicate with a person without

hearing or speech disabilities. Distributions from

the fund have grown substantially in recent years

which has increased the risk of fraud and im-

proper payments. The fund’s initial annual allot-

ment for disbursements was $30.8 million, which

increased over the next six years to $38 million in

1999. The TRS Fund has increased approximately

50-80% each year since then to reach $637 million

for the TRS Fund’s fiscal year from July, 2007 to

June, 2008. In the current fiscal year, from July,

2008 to June, 2009, the size of the TRS Fund is pro-

jected to grow to $805 million. This is an increase

of 26% from the previous fiscal year

During this reporting period, an Independent

Public Accountant (“IPA”) under contract to the

Office of Inspector General (“OIG”) completed

performance audits of seven TRS providers who

collectively received approximately 15 percent

of TRS payments made between 2006 and 2007.

The IPA was unable to complete the audit of the

eighth provider because that provider did not

supply the IPA with information that validated

the accuracy of the TRS costs and minutes of ser-

vice billed to, and received from, the TRS fund by

that provider.

The audits were conducted to determine whether

the Relay Service Data Requests and the monthly

reports of relay service minutes that were certified

and submitted by the TRS providers were: (i) in

Performance audits

audit activities


compliance with applicable laws and regulations;

and (ii) supported by sufficient documentation to

warrant reimbursement with federal funds.

The worked performed by the IPA found that TRS

providers’ processes for accumulating and re-

porting minutes of services provided and related

costs were not always adequate. This resulted in

some TRS providers being paid for unallowable

minutes of service from the TRS Fund.

The audit work also concluded that methodolo-

gies used by the TRS providers for accumulating

and reporting minutes of services provided and

related costs were not uniform. This increased

the risk that unreasonable, unallowable, unnec-

essary and inaccurate costs were considered in

the rate used to reimburse providers from the

TRS fund. These risks could result in rapid cost

growth and require higher funding rates. Man-

agement has taken steps to strengthen oversight

of the TRS Fund. However, additional policies

are needed to establish cost standards in order to

control costs, and stronger sanctions are needed

to combat fraud and abuse. Also, more effective

internal controls are needed to improve the op-

eration and administration of the TRS program

by the National Exchange Carrier Association,

Inc. Finally, with a compensable rate of at least

$376.11 per reportable hour for VRS services (the

maximum hourly rate is $404.17) and a median

rate of pay for a VRS interpreter of $ 17.79 per

hour (as of October 29, 2008), there would appear

to be approximately $358.32 or more of gross

margin per reportable hour to cover the other

costs associated with the provision of VRS tele-

communications services. That hourly margin,

when compared with the costs of broadband ser-

vices, suggests that the FCC needs to look much

more closely into the allowable expenses and the

capital costs that underlie the cost projections that

VRS providers submit to the FCC in setting the

rates that VRS providers receive per allowable

minute of reported service. Management initiat-

ed a broad examination into ways for improving

the management, administration, and oversight

of the TRS Fund and should consider adopting

additional, and more effective, cost controls.

Performance audits

audit activities


Review of Processes for Filing Public

Comments, Consumer Inquiries

and Complaints

In providing service to the public, the FCC re-

ceives comments and reply comments in FCC

proceedings and provides informal mediation

and resolution of consumer inquiries and com-

plaints. During this reporting period, KPMG

LLP, under contract to the OIG, completed its

assessment of the effectiveness of FCC controls

that were in place for processing the filing of

public comments, consumer inquiries and com-

plaints. This review concluded that although

the FCC has taken several steps to improve these

processes, additional improvements are needed.

FCC management agreed with the findings and

recommendations in part, while noting that the

FCC has made significant improvements in this

area and continues its work in developing addi-

tional improvements.

Fiscal Year 2008 Federal Information

Security Management Act Evaluation

and Risk Assessment

In accordance with the Federal Information Se-

curity Management Act (“FISMA”), the indepen-

dent certified public accounting firm of Clifton

Gunderson, L.L.P. (“CG-LLP”) was engaged to

perform the annual evaluation of the FCC’s in-

formation security programs and practices. CG-

LLP tested the effectiveness of security controls

for a subset of the Commission’s systems and the

FCC’s privacy management. CG-LLP reported

on September 12, 2008 that the FCC has an es-

tablished information security program and has

been reviewing security controls and identifying

areas to strengthen this program. Nonetheless,

there were findings for which corrective action

was recommended that relate to information

security administration, logical access controls,

application software development and change

controls, continuity of operations controls, and

contractor monitoring and oversight. None of

the weaknesses, either individually or collec-

tively, were deemed to be a significant deficiency

as that term has been defined by OMB reporting

instructions for FISMA reviews (Memorandum

M-08-21). FCC management generally concurred

with the recommendations and stated that it is

committed to continually strengthening the in-

PERFORMANCE audits

audit activities


Universal Service Fund (USF) oversight

ternal controls of the Commission.

Assessment of FCC Information

Technology Project Management

Total Systems Technologies Corporation (“TSTC”),

under contract to the OIG, performed an indepen-

dent assessment of Information Technology Proj-

ect Management (“ITPM”) at the FCC. As part of

this assessment, TSTC base-lined current project

management practices against government ma-

turity models/standards and identified areas for

improvement. In performing this assessment,

TSTC also identified key project management

components affecting project performance and

examined FCC performance factors, measures,

and metrics in relation to their correlation with

project success. TSTC provided recommenda-

tions to improve performance on different types

of FCC information technology (“IT”) projects as

well as overall information technology project

management. TSTC concluded that the Office of

Managing Director, as an organization, has tak-

en positive steps in developing an ITPM frame-

work. FCC management generally concurred

with TSTC’s recommendations and stated that it

is committed to continually strengthening the IT

investment and project management processes at

the Commission.

USF Oversight

In the last semiannual report, dated April 30, 2008,

we provided an update on the oversight activi-

ties of the USF program including Rounds 1 and

2 of attestation engagements of USF beneficiaries.

This report provides updates to those efforts as

well as progress on Round 3 audits.

The Office of Inspector General continues to over-

see a Universal Service Administrative Company

(“USAC”) administered effort to perform attes-

tation engagements of the USF program benefi-

ciaries. USAC entered into contracts with twelve

public accounting (audit) firms to perform these

engagements. Attestation audits are being per-

formed to comply with the Improper Payment

Information Act of 2002 (Public Law No. 107-300)

(“IPIA”) and Generally Accepted Government

Auditing Standards. IPIA implementation is a

audit activities


component of the President’s Management Agen-

da which is directed to reducing erroneous pay-

ments in the federal government. Agencies are re-

quired to review all programs and activities they

administer and identify those which may be sus-

ceptible to significant erroneous payments. IPIA

defines significant erroneous payments as annual

erroneous payments in any federal program that

exceeds both 2.5 percent of program payments

and $10 million.

These attestation engagements also address our

obligation to comply with the Inspector General

Act of 1978, as amended which, in relevant part,

charges Inspectors’ General with the responsibil-

ity for developing measures to detect and prevent

fraud, waste, and abuse in federal government

programs.

For Rounds 1, 2, and 3 we used statistical sampling

techniques to provide the number and identity of

beneficiaries subject to attest audits. Round 1 at-

testation engagements of the four USF support

programs were completed. They were:

• High Cost Program

• Schools and Libraries Program

• Low Income Program

• Rural Health Care Program

Additionally, attestation engagements of con-

tributors to the USF were performed.

Results from Round 1 are provided in the IG’s

October 3, 2007 reports. Briefly, those results in-

dicated that the High Cost, School and Libraries,

and Low Income programs are at risk based on

IPIA criteria. Results of the audits of contribu-

tors indicate room for improvement in the man-

agement of this contribution revenue.

Based on Round 1 results, we proceeded to again

perform audits (“Round 2 audits”) but only on

two USF funding categories, Schools and Librar-

ies and High Cost. Based on random statistical

sampling we selected 260 Schools and Librar-

ies Program and 390 High Cost Program ben-

eficiaries. These attestation engagements were

performed by 12 public accounting firms under

contract with USAC with oversight by the OIG.

The improper payment (IPIA) data results from

Round 2 have been delivered by the audit firms.

Field work on 649 of the 650 Round 2 attest audit


audit activities



reports have been submitted to USAC for qual-

ity review and approval. The preliminary statis-

tical analysis of improper payments by the OIG

determined that Schools and Libraries and High

Cost Programs will again exceed the IPIA thresh-

olds and are considered at risk programs. As a

result, OIG performed additional stratified statis-

tical samples of beneficiaries in the Schools and

Libraries and High Cost Programs resulting in a

third round (“Round 3”) of attestation engage-

ments. USAC is in process of contracting for the

audit services to conduct Round 3.

In Round 3, we intend to return to auditing on

all four USF support programs as well as contri-

butions. At this point, we have developed the

sample size and identified the beneficiaries of the

High Cost and Schools and Libraries Funds to be

attest audited.

The results from Round 1 and the preliminary re-

sults from Round 2 have not lessened our concern

about the possibilities for fraud, waste, and abuse

in the Commission’s USF programs as adminis-

tered by USAC. As a result, OIG has enhanced

the quality of its oversight of the USF programs

including the attestation engagements of the

Round 3 efforts.

For the Round 3 attestation efforts we have, or will

shortly effect, a number of changes to improve

efficiency and effectiveness. We are hiring to in-

crease our professional auditing staff from 5 to 18.

This will improve our ability to directly oversee

audit activity, especially in the field where audit

activity critical to the quality of information gath-

ered occurs. We plan to increase our field pres-

ence by 200% over Round 2. We hired a subject

matter expert in the High Cost Program to better

assess and recommend solutions to USF program

challenges.

We revamped the program to train audit firms.

This new training program is audit focused and,

in particular, emphasizes lessons learned, gen-

erally accepted government auditing standards,

American Institute of Certified Public Accoun-

tants Statement on Standards for Attestation En-

gagements, and effective auditing methods and

techniques.

Working with the telecommunications industry

and state associations, we have begun workshops

to educate beneficiaries directly regarding the

audit activities



High Cost Program and the attestation examina-

tion process. Our purpose is to reduce the num-

ber of attest findings, thereby reducing the error

rate and erroneous payments. With the addition

of audit personnel, it also became possible to insti-

tute procedures to followup on findings resulting

from all attestation engagements. This will allow

us to improve the audit process from the perspec-

tives of efficiency, timeliness and effectiveness.

As stated in the last Semiannual Report, Round 1,

which consisted of 459 attestation engagements,

was completed except for 48 of the 90 contributor

attestation engagements. As of this reporting pe-

riod, all audit reports including the 48 remaining

contributor reports are complete. Details on those

contributor audits with recommended funds for

recovery of $1.5 million are contained in Table

I. Further, as reported above, IPIA data results

from Round 2 have been delivered by the audit

firms and USAC is in the process of determining

potential recoveries of USF funds from those au-

dits. Several of those audits have been subject-

ed to USAC’s quality assurance process and are

near finalization. As of the end of the reporting

period, the audit firms have reported on an ad-

ditional 12 high cost fund beneficiaries and iden-

tified improper payments totaling $360,378 at

eight of those locations (see Table II for details).

Also, USAC has identified preliminary poten-

tial funding recoveries totaling $1,225,621 at 22

schools and libraries beneficiaries. Please see

Table III below for details.

These statistical analyses of the USF programs

and targeted attestation engagements will im-

prove the application of investigative and audit

resources and yield information to the Commis-

sion that will enable it to improve the admin-

istration of these programs and further reduce

fraud, waste and abuse.

Support to Investigations

In addition to the audit component of our over-

sight program, we have provided, and continue

to provide, audit and investigative support to

United States Department of Justice investiga-

tions of E-rate and High Cost fund recipients.

To implement the investigative component of

this effort, we developed a working relationship

with the Antitrust Division of the Department

of Justice (“DOJ”). The Antitrust Division, in

(continued on page 24)

audit activities



These statistical analyses of the USF pro-

grams and targeted attestation engagements

will im

TABLE I: USF Audits Finalized during SAR Reporting Period

Carrier Name Filer ID # Expected

Contribution Change

USAC Board

Approval of Audit

HeadquartersState

South Carolina RSA #2 Cellular 818464 $0 6/6/2008 ARWaterloo Cedar Falls CellTelCo 802752 $4,191 6/6/2008 ILAmerican Telesis 821260 $43,119 6/6/2008 SCDenton Telecom 822850 $0 6/6/2008 TXEllington Telephone 805692 $0 6/6/2008 MOMadison River Communications 820646 $354,336 6/6/2008 LAMobilfone Service Inc 820284 $0 6/6/2008 WVN Touch Communications 824594 $0 6/6/2008 TNNavajo Tribal Utility 825696 $0 6/6/2008 AZNew Hope Telephone Cooperative 805623 $0 6/6/2008 ALOcala Communication 825636 $0 6/6/2008 FLPeoples Telephone 803007 $22,573 6/6/2008 TXPine Belt Cellular 811304 $313 6/6/2008 ALPine Belt Telephone 801888 $0 6/6/2008 ALPine Island Telephone Company 801924 $0 6/6/2008 MNPlatte Valley Communications of Kearney 815420 $0 6/6/2008 NEQtel LLC 824346 $0 6/6/2008 NYRedwood County Telephone Company 807708 $17,606 6/6/2008 MNRoadrunner Communications 821692 $0 6/6/2008 MNSJI Networks Company 824766 $859 6/6/2008 LASkyriver Communications 825150 $0 6/6/2008 CATeleplex Coin Communications 812821 $0 6/6/2008 NYThe Golden Belt Telephone Association 801084 $27,968 6/6/2008 KSVanco Direct USA 825393 $0 6/6/2008 ILVision Net Inc 816972 $0 6/6/2008 MTWaitsfield Fayston Telephone 803463 $0 6/6/2008 VTWalnut Hill Telephone Company 802509 $9,870 6/6/2008 ARWynn Communications Group 806880 $0 6/6/2008 NCLone Star PCS 825691 $0 6/6/2008 TXCTE Telecom LLC 822888 $903,450 6/6/2008 CTFayetteville MSA 806222 $0 6/6/2008 ARForte Communications Inc 821068 $0 6/6/2008 ILGemini Companies Inc 817662 $0 6/6/2008 MNHargray Inc 821672 $436 6/6/2008 SCMain Street Telephone Company 823582 $0 6/6/2008 PANexband Communications 815916 $0 6/6/2008 MSNext Gen Telephone 819863 $37,025 6/6/2008 NYNorth English 801033 $0 6/6/2008 IARingsted Telephone Company 803697 $0 6/6/2008 IAScranton Telephone Company 809630 $0 6/6/2008 IASoftswitch Communications 822994 $0 6/6/2008 TXSouth Canaan Long Distance 814765 $0 6/6/2008 PATelchin Corp 825660 $0 6/6/2008 FLThink 12 Corp 824312 $0 6/6/2008 ILUni-Tel of Farmington 815156 $3,083 6/6/2008 NMWantel Inc 822642 $56,952 6/6/2008 ORWestern Wahkiakum County Tel 802254 $0 6/6/2008 WAOne Eighty Communications 821850 $64,788 9/9/2008 ORTOTAL Contribution Potential Recovery $1,546,569

audit activities


Table II: USF Round 2 High Cost Audits through the Quality Assurance Processduring this Semi-Annual Report Reporting Period

Assignment Number Beneficiary Total Estimated ImproperPayment

HC-2007-082 Iowa Rsa No. 2 Limited Partnership $94,521HC-2007-086 Nebraska Tech. & Telecommunications, Inc. $13,107HC-2007-090 North Central Rsa 2 Of North Dakota LP $0 HC-2007-092 Northwest Dakota Cellular Of North Dakota

LP $249,021

HC-2007-171 Barnes City Cooperative Telephone Company $0HC-2007-176 Cedar County Pcs, LLC $2,229HC-2007-182 Rcc Minnesota $0HC-2007-183 Rcc Minnesota, Inc. $0HC-2007-184 Rcc Minnesota, Inc. $52HC-2007-185 Rcc Minnesota, Inc $30HC-2007-187 Sei Wireless LLC $1,385HC-2007-191 Virginia Cellular LLC $33 TOTAL Estimated Improper Payments $360,378Total Estimated Improper Payment is as defined by the IPIA and does not necessarily reflect the projected recovery amount. USAC could not provide a preliminary recommended recovery amount in time for inclusion in this report.

TABLE III: USF Round 2 Schools and Libraries Audits through the Quality Assurance Processduring this Semi-Annual Report Reporting Period

Assignment Number Beneficiary USAC ProjectedRecovery Amount SL-2007-001 Brentwood Union Free Dist $0SL-2007-005 Clarkstown Central School Dist $0SL-2007-010 Etowah County School District $2,305SL-2007-012 Franklin County School Dist $0SL-2007-018 Hillside Children's Center School $0SL-2007-023 Lowndes County School District $0SL-2007-028 Okeechobee County School Dist $0SL-2007-039 Talmud Torah Tzoin Yosef Pupa Inc. $0SL-2007-041 Anoka-Hennepin School Dist 11 $90,675SL-2007-042 Ashe County School District $319SL-2007-048 Hart Indep School District $0SL-2007-049 Inter Lakes Coop School Dist $0SL-2007-050 Iredell-Statesville Sch Dist $0SL-2007-051 Kansas City Unif Sch Dist 500 $9,714SL-2007-053 Manhattan Unif School Dist 383 $1,529SL-2007-058 Minnetonka School District 276 $25,395

Table III continued on the following page.

audit activities


TABLE III: USF Round 2 Schools and Libraries Audits through the Quality Assurance Processduring this Semi-Annual Report Reporting Period (continued)

Assignment Number Beneficiary USAC ProjectedRecovery Amount SL-2007-060 New Lexington City School Dist $0SL-2007-063 Renwick Unif School Dist 267 $1,209SL-2007-064 Rippey Elementary2 $0 SL-2007-067 Shepherd School District 37 $0SL-2007-073 Wooster City School District $22,247SL-2007-078 Monroe Twp Public Schools $128,868SL-2007-084 Central Union High School Dist $8,496SL-2007-086 Corcoran Jt. Unified School District $0SL-2007-091 Woodlake Union High Sch Dist $0SL-2007-105 Groesbeck Indep School Dist $0SL-2007-111 Lexington County Public Library $0SL-2007-124 Texas School For The Blind $0SL-2007-128 Aldine Indep School District $0SL-2007-130 Arlington Public School Dist $0SL-2007-131 Azusa Unified School District $0SL-2007-132 Baltimore City School District $0SL-2007-138 Butler County School District $18,541SL-2007-139 Chattooga County School Dist $0SL-2007-145 Clinton Indep School Dist 99 $0SL-2007-148 Columbus County School Dist $0SL-2007-156 East Cleveland City Sch Dist $236,298SL-2007-158 Emmett School District 221 $0SL-2007-162 Fort Bend Indep School Dist $0SL-2007-166 Gaston County School District $11,890SL-2007-173 Hamden Public School District $1,971

SL-2007-175 Hobbs Municipal School Dist $11,567SL-2007-180 Incarnation Elementary School $4,110SL-2007-182 Jackson County School District $0SL-2007-186 Katy Indep School District $23,002SL-2007-192 La Salle Parish School Dist $0SL-2007-194 Lancaster School District $460,555SL-2007-202 Miami-Dade County Public Schools $0SL-2007-206 Msd Lawrence Township $0SL-2007-211 Northridge Local S D-Dayton $163,589SL-2007-219 Pascagoula School District $1,356SL-2007-223 Portsmouth Public Library $0SL-2007-232 Schenectady City School Dist $403SL-2007-244 Thomasville City School Dist $1,582

TOTAL USAC Projected Recovery Amount $1,225,621

audit activities



(continued from page 20)

turn, has established a task force to conduct

USF investigations that is comprised of attor-

neys in each of the Antitrust Division’s seven

field offices and the National Criminal Of-

fice. As of the end of this reporting period,

we are directly supporting 31 investigations

and monitoring an additional 8 investigations.

Please refer to the Investigations section of this

report for further information.

USAC Management

The Inspector General met with USAC’s Act-

ing Chief Executive Officer and explained his

concerns with respect to USAC’s operations

and responsiveness, as well as the size, train-

ing and competence of its workforce. Similar

or related concerns have been expressed by

the FCC’s Chief of the Wireline Competition

Bureau, the FCC’s Office of Managing Direc-

tor and the Inspector General to the Chairman

of USAC’s Board of Directors and at regular

quarterly meetings with the Executive Com-

mittee of the USAC Board of Directors.

During those meetings, additional concern

was communicated concerning USAC’s sense of

limited accountability to, and lack of effective and

candid communications with, the FCC. Those

assessments have also been communicated sepa-

rately to USAC’s Acting Chief Executive Officer.

And, although the FCC’s Managing Director di-

rected USAC to take steps to improve its manage-

ment and to operate in a more efficient and ef-

fective manner (e.g., initiating a customer service

program and website portal, requiring USAC to

provide recommendations that USAC could take

to prevent improper payments (including re-

source requirements and associated costs)), it has

become increasingly apparent that a sharper fo-

cus on USAC’s administrative processes, internal

controls and management will be necessary.

Accordingly, the OIG contracted with auditing

firms to assess and evaluate the operations of

USAC’s management, staff, and Board of Direc-

tors subcommittees that oversee the High Cost

and Low Income Programs and the Schools and

Libraries Program during this reporting period.

The Inspector General also initiated an audit of

USAC’s travel and professional services expens-

es.

audit activities


Did you know?

OIG’s investigative staff has grown from two in January 2006 to 14 as of September 30, 2008.

Investigations

ACTIVITY DURING THIS PERIOD

significant INVESTIGATIVE CASESUMMARIES

OIG HOTLINE

investigations

28 Investigations - September 2008

Federal Communications Commission (FCC)

Office of Inspector General (OIG) investiga-

tions are frequently initiated on the basis of al-

legations of employee misbehavior, violations

of federal law or FCC regulations or other

forms of fraud, waste or abuse. These inves-

tigations often address allegations of fraud in

FCC programs, such as the Spectrum Auction

and Federal Universal Service Programs, or

other criminal activity or misconduct within

the FCC or its programs. We also receive com-

plaints regarding the manner in which the FCC

executes its programs, how the FCC handles its

operations administratively, and how the FCC

conducts its oversight responsibilities.

Allegations come from all sources. FCC man-

agers, employees, contractors, and other stake-

holders often contact the OIG directly with

concerns about fraud, waste or abuse. Indi-

viduals call or e-mail the OIG Hotline, or send

complaints through the United States mail.

These allegations can be, and frequently are,

made anonymously. Other government agen-

cies, federal, state and local, including the Gov-

ernment Accountability Office, the Office of

Special Counsel, and congressional and senato-

rial offices, refer matters to the OIG for poten-

tial investigation. In addition, investigations

may develop from OIG audits or inspections

that discover evidence or indications of fraud,

waste, abuse, misconduct, corruption, or mis-

management of FCC programs or operational

segments.

After receiving an allegation, the Assistant In-

spector General for Investigations (AIGI) or one

of his staff will conduct a preliminary review of

the matter to determine if an investigation or

referral is warranted. Sometimes serious al-

legations may merit attention, but are outside

the jurisdiction of the OIG. These allegations

would be referred to the appropriate entity,

usually another office or bureau in the FCC or

another federal or law enforcement agency, for

review and response to the complainant. As

much as possible, the OIG continues to be in-

volved and serve as a facilitator for complaints

that are outside the jurisdiction of this office.

The OIG, like most government offices, has an

ever-increasing volume of work and dedicated

but limited resources. Therefore, allegations

of matters within the jurisdiction of the OIG

are reviewed for assignment and priority in a

“triage” method. Matters that have the poten-

tial to significantly impact federal funds, im-

investigations

Investigations - September 2008 29

portant FCC missions or programs, or the basic

integrity and working of the agency receive the

highest priority for investigation and assignment

of resources.

The OIG works not only on a large number of in-

vestigations, but a large variety of investigations.

We deal with complex cyber crime investigations,

cases involving large criminal conspiracies, and

on matters throughout the United States and ter-

ritories. These complex and wide-ranging cases

often require substantial investigative expertise

and resources that the OIG itself does not have,

which can include needing personnel on the

ground across several states or high-grade foren-

sic tools and the expertise to use them. In these

cases, we have always received, and are grateful

for, the assistance of other agencies, especially in-

cluding the OIG of other federal agencies. For ex-

ample, in one matter the Office of Inspector Gen-

eral for the United States Postal Service obtained

evidence for our office by using his criminal in-

vestigators. This cooperative and coordinated ef-

fort saved this office valuable time and expense

by not having to send our agents out in the field

where other inspector general criminal investiga-

tors were already located.

The AIGI and his staff also work with other agen-

cies, including the U.S. Department of Justice, to

support their criminal and civil investigations

and prosecutions relating to FCC missions and

programs. Many of these investigations and pros-

ecutions involve fraud pertaining to the federal

Universal Service Program, sometimes referred to

as the Universal Service Fund or USF. One of the

USF programs that benefits schools and libraries

across the nation, often know as the E-Rate Pro-

gram, has been a prime target for fraud but has

also been the focus of joint and coordinated in-

vestigation and prosecution efforts by the Depart-

ment of Justice and the FCC and its OIG. Those

efforts have now resulted in a history of success-

ful prosecutions and indictments, and of restitu-

tion for such fraud to the USF.

Activity During This Period

At the outset of this reporting period, eighty (80)

cases were pending. Thirty-six (36) of those cases

involve the Commission’s Universal Service Fund

(“USF”) program and have been referred to the

Federal Bureau of Investigation (“FBI”) and/or

the U.S. Department of Justice. An additional

twenty-one (21) non-USF and six (6) USF related

complaints were received during the current re-

investigations


porting period. Over the last six months, thirteen

(13) cases, three (3) USF and ten (10) non-USF re-

lated, have been closed. As a consequence, a to-

tal of ninety-four (94) cases are pending, of which

thirty-nine (39) relate to the USF program. The

OIG continues to monitor, coordinate and/or sup-

port activities regarding those thirty-nine (39)

investigations. The investigations pertaining to

the pending fifty-five (55) non-USF cases are on-

going.

Significant Case Summaries

Several of the most recent efforts of this office are

described below. There are, however, many other

matters that, due to their sensitive nature or re-

lated investigations, cannot be included.

Phase I of the OIG’s Investigation into the

700 MHz D Block Auction

During this period, Chairman Kevin Martin re-

quested an investigation into allegations that an

entity, Cyren Call Communications Corporation

(“Cyren Call”), discouraged potential bidders

from participating in the Commission’s 700 MHz

D Block Auction (“Auction 73”) by discussing

with potential bidders a lease payment that any

eventual D Block winning bidder would have

to pay to the Public Safety Broadband Licensee

(“PSBL”). Auction 73 closed on March 18, 2008,

with a record $19.6 billion in bids. The D Block,

the commercial spectrum made available for a

public/private partnership to create a nationwide

public safety network, received only one early

round bid, from Qualcomm Incorporated, which

was significantly lower than the $1.33 billion re-

serve price. The OIG’s report of investigation ul-

timately concluded that there were many factors

that turned potential bidders away from partici-

pating in Auction 73 and the lease payment issue

was only one of those factors.

On March 20, 2008, Chairman Martin asked the

Inspector General to investigate the allegations in

several online wireless newspapers and “blogs”

and included in a March 19, 2008 letter to the

Chairman from Harold Feld, Senior Vice Presi-

dent of the Media Access Project (“MAP”) and a

StatisticsCases Pending as of April 1, 2008 80

New Cases 27

Cases Closed 13

Cases Pending as ofSeptember 30, 2008 94

investigations


representative of the Public Interest Spectrum Co-

alition (“PISC”). PISC, through Mr. Feld’s letter,

specifically asked that the Commission investi-

gate the allegations regarding “a purported meet-

ing between Frontline Wireless (“Frontline”), its

financial backers, and Morgan O’Brien of Cyren

Call that may have had the effect of preventing

Frontline from attracting needed capital and dis-

couraging other bidders.”

The OIG investigative team interviewed offi-

cials from the FCC, Public Safety Spectrum Trust

(“PSST,” holder of the PSBL), Cyren Call, Mr. Feld,

and representatives of potential D Block bidders

including AT&T, Frontline, Qualcomm, and Veri-

zon Wireless (“Verizon”).

The investigation determined that Cyren Call of-

ficials met with Frontline and Verizon to discuss

an estimated spectrum lease payment amount of

$50 to $55 million (amount varied depending on

the interviewee) per year for a period of ten years.

All of these meetings took place prior to the “Qui-

et Period,” when the FCC auction anti-collusion

rule was in effect. (The anti-collusion rule prohib-

its FCC auction applicants from communicating

their bids or bidding strategies with each other

from the short-form application deadline to the

post-auction down payment deadline. The rule is

intended to foster a level playing field and ensure

that the government receives a fair market price

for spectrum.) The lease payment was discussed

as an estimated amount that was included in the

PSST business plan, but it was clear that the actual

number would result from negotiations after the

auction. Frontline, as well as other entities inter-

viewed, stated that the lease payment amount was

only one of many factors it considered in deciding

whether to participate in the D Block. Witnesses

from all of the entities interviewed also described

a host of problems and concerns with the D Block

that, as a whole, deterred their participation in

the D Block.

On April 25, 2008, the OIG reported the results

of its D Block investigation, concluding that the

evidence established that the lease payment dis-

cussed at Cyren Call’s meetings with Verizon and

Frontline was not the only factor in the poten-

tial bidders’ decisions not to bid on the D Block.

Rather, the investigation established that the un-

certainties and risks associated with the D Block,

including, but not limited to, the negotiation

framework with PSST, the potential for default

payment if negotiations failed, and the costs of

the build-out and the operations of the network,

investigations


taken together, deterred potential bidders from

bidding on the D Block.

Subsequently, on May 14, 2008, the Commis-

sion re-opened the rulemaking pertaining to the

D Block rules to examine various issues, includ-

ing the issue of spectrum lease payments to the

PSBL.

Phase II of the OIG’s Investigation into the

700 MHz D Block Auction

On May 23, 2008, the U.S. House of Representa-

tives’ Committee on Energy and Commerce (the

“Committee”) requested that the Inspector Gen-

eral investigate whether the relationship between

Cyren Call and PSST was consistent with the

Commission rule that prohibited entities from

holding commercials interests in the PSBL, and

prohibited commercial interests from participat-

ing in the management of the PSBL. The Commit-

tee asked the IG to consider whether the parties’

existing relationship is consistent with the rule,

and also whether “any future, post-auction plans

by Cyren Call...including any plans to create or

be involved with a mobile virtual network opera-

tor...would violate the [rule’s] prohibition.” This

investigation remains on-going because many

issues that could affect the subject matter of the

requested investigation, including the rules being

examined in the Commission’s D Block rulemak-

ing noted above, are still being resolved.

FTC v. Neovi, Inc., d/b/a Neovi Data Corpora-

tion and Qchex.com, et al.

During this period, the OIG supported the Fed-

eral Trade Commission (“FTC”) in the matter of

FTC v. Neovi, Inc., d/b/a Neovi Data Corporation

and Qchex.com, et al., a case before the United

States District Court for the Southern District of

California. Defendants marketed a series of soft-

ware programs that operated under the Qchex.

com website. Users of the software could enter

check and bank account information and use the

site to send checks to third parties via email or the

United States Postal Service. Qchex customers

provided only raw data that defendants convert-

ed into negotiable instruments by taking the data

and composing a check document that matched

U.S. banking regulations when printed.

From the outset the Qchex “system” was manipu-

lated by fraudulent individuals who requested

checks without having authority over the bank

account upon which it was to be drawn. The FTC

investigations


alleged that the defendants assisted these indi-

viduals by failing to take adequate measures to

verify that they had actual authority over the

bank accounts they stated belonged to them.

Defendants started receiving complaints about

the fraudulent use of their system from the out-

set. According to the defendant’s database, from

2000 to 2006 nearly 155,000 checks from 13,770

Qchex accounts were frozen for fraudulent ac-

tivity. In time, this included 186 federal, state,

and local law enforcement agencies.

On September 16, 2008, the court granted the

FTC’s Motion for Summary Judgment, in part.

That motion sought an injunction that, in part:

(1) prohibited defendants from creating and

delivering checks without adopting reasonable

verification procedures; (2) restrained defen-

dants from failing to respond to consumer com-

plaints; (3) prohibited defendants from failing

to protect consumers’ private financial account

information; (4) ordered defendants to disgorge

$535,358; and (5) ordered defendants to comply

with monitoring and reporting requirements.

The Court will determine the remedy after the

filing of supplemental briefs.

Because the role of this office in the joint Qchex

investigation has been completed, the FCC OIG in-

vestigation into this matter has been closed.

Media Bureau Procedures Regarding

NCE FM Stations

During this period, the OIG initiated an inquiry

into a procedure followed by the Media Bureau re-

garding the handling of applications for the right to

make changes to, or to operate, new non-commercial

educational (“NCE”) FM stations. Applicants who

sought to make minor modifications, i.e., not ma-

jor or new applications, complained that they were

unnecessarily inconvenienced and their positions

made vulnerable by not having early access to the

NCE band proposals. The NCE band proposals are

not made public until weeks after the filing period

ends. Applications for minor modifications can be

made at any time, but must not interfere with the

broadcast contour integrity in earlier applications.

By not having access to the new or major applica-

tions, those filing for minor applications argued

that they had to file in an information vacuum and

“guess” at the location and dimensions of the NCE

applicants so as to not create a conflict with them.

The OIG concluded that, while the Media Bureau

articulated legitimate reasons for proceeding as it

did, this office will make recommendations to help

investigations


devise a system that will better address the needs

of the regulated community.

United States v. Eldon Anderson

During this period, the OIG supported the De-

partment of Justice in a criminal prosecution of

Eldon Anderson. Mr. Anderson was indicted on

14 counts of securities fraud and 12 counts of mail

fraud for selling unregistered securities. He en-

tered into a plea agreement on March 28, 2008,

and is awaiting sentencing. He faces between 6½

to 8 years in federal prison, and has been ordered

to pay full restitution for his fraudulent securities

scheme.

Consolidated Database System

During this period, the OIG initiated an inquiry

into allegations that the Media Bureau’s Consoli-

dated Database System (“CDBS”) was flawed.

CDBS is the licensing application software sys-

tem that the Media Bureau has made available for

public filings since 2000. Because remedial efforts

regarding this system were already underway,

OIG noted the alleged flaws to the Office of Man-

aging Director and may test the new system once

it is publicly available.

Recent USF E-Rate Fraud Prosecution Successes

The USF program that benefits schools and librar-

ies across the nation is often called the E-Rate Pro-

gram. As noted above, that program has been a

prime target for fraud but has also been the focus

of joint and coordinated federal investigation and

prosecution efforts by the U.S. Department of Jus-

tice and the FCC and its OIG. Those interagency

efforts have resulted in a history of successful

prosecutions and indictments, and of restitution

for such fraud to the USF. Several of the most re-

cent successes in that effort are described below.

Illegally Influencing a Grand Jury –

the William Coleman Matter

In September 2008, William Coleman, the former

Deputy Superintendent and Chief Operating Of-

ficer of Dallas Independent School District, was

sentenced to one year of probation and a $5,000

fine for trying to influence a grand jury that was

investigating a bribery and money laundering

scheme in the Dallas Independent School District.

Bribery and money laundering charges against the

former Dallas school administrator were dropped

investigations


in exchange for his guilty plea in May 2008.

Mail Fraud – the Fort Berthold Indian

Reservation Matter

In September 2008, Global Networking Technol-

ogy, Inc., of Gurnee, Illinois, and Computer Train-

ing and Associates, Inc., of North Chicago, Illinois,

through corporation representatives Tyrone Pipkin

and Gloria Harper, plead guilty to mail fraud and

agreed to pay $241,000 in restitution for allegedly

using a North Dakota school district on the Fort

Berthold Indian Reservation to defraud the E-rate

program.

Dallas Independent School District and

Micro Systems Engineering, Inc.

In July 2008, a federal jury convicted Ruben B. Bohu-

chot, the former Dallas Independent School Dis-

trict technology director, on 13 counts and Frankie

Wong, president of Micro Systems Engineering,

Inc., on 10 counts involving offenses related to the

operation of bribery, conspiracy, and money laun-

dering schemes involving technology contracts.

Federal prosecutors presented evidence that the for-

mer technology director steered two multimillion-

dollar contracts to the vendor in return for cash,

rounds of golf, meals, trips and dozens of deep-

sea outings on two sport-fishing boats that the

technology director christened Sir Veza I and II.

The jury found that the individuals should for-

feit $1.2 million as the proceeds for their crimes.

Sentencing is scheduled for October, 2008 with

both individuals facing a maximum of 10 years

in prison and a $250,000 fine for each bribery

count and 20 years and a $500,000 fine for the

money laundering charge.

Conspiracy -- the Douglas and Mary Jo

LaDuron Matter

In April 2008, Leonard Douglas “Doug” La-

Duron and his mother, Mary Jo LaDuron, aka

Mary Jo Gault, were indicted in the U.S. District

Court in Kansas City, Kansas, for participating

in a conspiracy to defraud the E-Rate program.

Doug LaDuron, former owner of Serious ISP

Inc., Myco Technologies Inc., and Elephantine

Corporation, carried out the alleged conspiracy

by submitting false statements and concealing

material facts from the administrators of the E-

Rate program. The indictment also alleges Mary

Jo LaDuron fraudulently represented herself as

an independent consultant, and steered E-Rate

contracts to companies owned by her son as well

investigations


as to co-conspirators, Benjamin Rowner and Jay

H. Soled.

Concealing Material Facts – the

DeltaNet Matter

In April 2008, Benjamin Rowner and Jay H.

Soled, former owners of DeltaNet, a New Jer-

sey computer service provider, plead guilty to

charges related to defrauding the E-Rate pro-

gram. The pair conspired to defraud the E-Rate

program by submitting false statements and

keeping important information from the admin-

istrators of the program. The men have agreed

to cooperate with the U.S. Department of Jus-

tice’s on-going investigation into E-Rate fraud.

Bribery and Conspiracy -- the R.

Clay Harris Matter

In July 2008, R. Clay Harris was found guilty by

a federal jury on charges of bribery and conspir-

ing to bribe Arthur Scott, the former Director of

Operational Technology/Telecommunications

for Atlanta Public Schools. Harris was the Chief

Executive Officer and majority owner of Mul-

timedia Communications Services Corporation

while co-conspirator Scott was responsible for

managing and overseeing the E-Rate program

for Atlanta Public Schools. Arthur Scott pleaded

guilty to conspiracy and bribery charges in May

2007, and testified at trial against Harris. Sentenc-

ing is scheduled for October 2008 and Harris faces a

maximum sentence of 45 years in federal prison.

OIG Hotline

During this reporting period, the OIG Hotline tech-

nician received numerous calls to the published

hotline numbers of (202) 418-0473 and 1-888-863-

2244 (toll free). The OIG Hotline continues to be

a vehicle by which Commission employees and

parties external to the FCC can contact the OIG to

speak with a trained Hotline technician. Callers

who have general questions or concerns not specifi-

cally related to the missions or functions of the OIG

office are referred to the FCC Consumer Center at

1-888-225-5322. In addition, the OIG also refers

calls that do not fall within its jurisdiction to other

entities, such as other FCC offices, federal agen-

cies and local or state governments. Examples of

calls referred to the Consumer Center or other FCC

offices include complaints pertaining to custom-

ers’ phone service and local cable providers, long-

distance carrier slamming, interference, or similar

matters within the program responsibility of other

FCC bureaus and offices.

investigations


During this reporting period, we received 608 Hotline contacts, which resulted in OIG taking action on

21 of these. The remaining calls were forwarded to the other FCC bureaus and offices, primarily the

FCC Consumer Center (340 calls) and other federal agencies, primarily the Federal Trade Commission

(247 calls).1

1 In our previous semiannual report, we identified 72 Hotline calls as “awaiting disposition” at the end of the reporting period. In fact, the disposition of those calls had been resolved during the prior reporting period and they are not included in the statistics for this reporting period.

OIG Hotline Calls Record April 1, 2008 - September 30, 2008

Other Federal Agencies (247)

FCC Bureaus/Offices

(340)

FCC OIG(21)

FCC Bureaus/Offices

Other Federal Agencies

FCC OIG

reporting requirements of the inspector general act

Reporting Requirementsof Section 5(a)

table i: oig reports withquestioned costs

table II: oig reports withrecommendations that funds be put

to better use

reporting requirements

40 Reporting Requirements - September 2008

The following summarizes the Office of Inspector General response to the 12 specific reporting re-quirements set forth in Section 5(a) of the Inspector General Act of 1978, as amended.

1. A description of significant problems, abuses, and deficiencies relating to the administration of pro-grams and operations of such establishment disclosed by such activities during the reporting period.

Please refer to the section of this report titled “Universal Service Fund” and the section of this report captioned “Telecommunications Relay Service.”

2. A description of the recommendations for corrective action made by the Office during the reporting period with respect to significant problems, abused, or deficiencies identified pursuant to paragraph (1).

Please refer to the section of this report titled “Universal Service Fund” section of this report captioned “Tele-communications Relay Service.”

3. An identification of each significant recommendation described in previous semiannual reports on which corrective action has not yet been completed.

No significant recommendations remain outstanding.

4. A summary of matters referred to authorities, and the prosecutions and convictions which have resulted.

Please refer to the section of this report entitled “Universal Service Fund” and the section of this report entitled “Investigations.”

5. A summary of each report made to the head of the establishment under section (6) (b) (2) during the reporting period.

No report was made to the Chairman of the FCC under section (6) (b) (2) during this reporting period.

6. A listing, subdivided according to subject matter, of each audit report issued by the Office during the reporting period, and for each audit report, where applicable, the total dollar value of questioned costs (including a separate category for the dollar value of unsupported costs) and the dollar value of recommendations that funds be put to better use.

Each audit report issued during the reporting period is listed according to subject matter and described in the “Audit Areas” section and in Tables I and II of this report.

7. A summary of each particularly significant report.

Each significant audit and investigative report issued during the reporting period is summarized within the audits and investigations sections and in Tables I and II of this report.

8. Statistical tables showing the total number of audit reports with questioned costs and the total dol-


Reporting Requirements - September 20078 41

lar value of questioned costs.

The required statistical table can be found at Table I to this report. See also the statistical estimates of erroneous payments made in the “Universal Service Fund” section of this report.

9. Statistical tables showing the total number of audit reports with recommendations that funds be put to better use and the total dollar value of such recommendations. The required statistical table can be found at Table II to this report and in the section captioned “Universal Ser-vice Fund.”

10. A summary of each audit report issued before the commencement of the reporting period for which no management decision has been made by the end of the reporting period (including the date and title of each such report), an explanation of the reasons why such a management decision has not been made, and a statement concerning the desired timetable for achieving a management decision on each such report.

No audit reports fall within this category.

11. A description and explanation of the reasons for any significant revised management decision made during the reporting period.

No management decisions fall within this category.

12. Information concerning any significant management decision with which the Inspector General is in disagreement.

No management decisions fall within this category.

13. Information described under section 05(b) of the Federal Financial Management Improvement Act of 1996.

No reports with this information have been issued during this reporting period.


42 Reporting Requirements - September 2008

Table I: OIG Reports With Questioned Costs

Inspector General Reports With Questioned Costs Number of Reports

Questioned Costs

Unsupported Costs

A. For which no management decision has been made by the commencement of the reporting period. _ _ _

B. Which were issued during the reporting period. 15$1,546,569

_

C. For which a management decision was made during the reporting period. 15 $1,546,569 _

(i) Dollar value of disallowed costs _ _ _

(ii) Dollar value of costs not disallowed _ _ _

D. For which no management decision has been made by the end of the reporting period. _ _ _

Reports for which no management decision was made within six months of issuance. _ _ _


Reporting Requirements - September 20078 43

Table II: OIG Reports With Recommendations That Funds Be Put To Better Use

Inspector General Reports With Recommendations That Funds Be Put To Better Use Number of Reports Dollar Value

A. For which no management decision has been made by the commencement of the reporting period. _ _

B. Which were issued during the reporting period. _ _

C. For which a management decision was made during the reporting period. _ _

(i) Dollar value of disallowed costs _ _

(ii) Dollar value of costs not disallowed _ _

D. For which no management decision has been made by the end of the reporting period. _ _

Reports for which no management decision was made within six months of issuance. _ _

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The Federal Communications Commission(left to right)

Deborah Taylor Tate, Commissioner; Michael J. Copps,Commissioner; Kevin J. Martin, Chairman; Jonathan S. Adelstein,

Commissioner; Robert M. McDowell, Commissioner

[email protected]

Call Hotline:202.418.0473 or 888.863.2244

www.FCC.gov

Report Fraud, Waste or Abuse to:

You are always welcome to write or visit.Office of Inspector GeneralFederal Communications CommissionPortals II Building445 12th St., S.W. Room 2-C762

FEDERAL COMMUNICATIONS COMMISSION

OFFICE OF THEINSPECTOR GENERAL

Semiannual Report to Congress

Kent R. NilssonInspector General

Federal Communications CommissionOffice of the Inspector General

445 12th St., SWWashington DC 20554www.FCC.gov/OIG

April 1, 2008 - September 30, 2008

Documents

Kent R. Nilsson Washington DC 20554 Inspector …report summarizing the activities and accomplishments of the Office of the Inspector General (“OIG”) during the six-month period